Deja vu all Over Again.

The recent kerfuffle around the
deficit is mindboggling on many levels. For instance, it's deja vu in terms of
the recession and the deficit, and in terms of the current climate of
distractions and dissembling, which led to a place where America did not need
tread--on the plane of credit downgrade.

There are two significantly
adversarial forces that seemingly moved toward convergence at this time in
America's history--(1) the colossal recession of 2008 (including the sluggishly "rebounding" economy), and (2) the ongoing (persistent) electioneering for the
highest office of the land, both by the current incumbent and by the slew of
candidates slinging mud at their opponents, and in some (or one case) instances
carpet bombing them--with obscene amounts of money, courtesy of the Supreme
Court ruling on Citizens United. This will come to a head in November 2012. For
now, however, the economy is mending, albeit slowly, but mending nevertheless.
This is good because the number (in the neighborhood of 12.8 million) of Americans unemployed and seeking work is high. There
is no need to elaborate on this latter data because deep down in the core of
everyone's thoughts there is a clear understanding of what it is like to be
without a job--from personal experience or from just knowing a friend or
relative who is unemployed.

Elections matter because presidents nominate justices to the Supreme
Court. The nominations made in the past decade have had major consequences, one
of which is the Supreme Court's Citizens United ruling. My initial reaction was
this is a bad thing. It seems as if
the Court is coming up to speed in recognizing it might have over reached here.
It was a way around campaign financing laws by making corporation persons,
invoking 1st amendment freedom of speech provisions; asserting money
is speech, and thus allowing corporations (unions, too) to spend unlimited sums
on candidates. This allows Super PACs to bundle large sums money from
anonymous donors (some quite wealthy) to finance negative ads against their opponents,
so long as the Super PACs are acting on their own and not in collusion with the
candidates. This is just a façade of independence that fools no one. Perhaps
that's why President Obama could not return comedian/satirist Bill Maher's $1
million to pro-Obama Super PAC, Priorities USA Action
despite clamors for him to do so.

What I find astonishing is that very smart people, with academic
credentials sticking out of their ears, are unable to appreciate the unintended
consequences of their rulings. Perhaps, there's a reservoirs of stoicism in the
persona of politicians that make them party to ambiguities without remorse.
They claim independence from Super PACs when they are not; when they run on jobs
but rule on budgets; when the Patient Protection and Affordable Care Act
becomes the pejorative Obamacare; where Romneycare is not equal to Obamacare;
where Death Panels are the construct
of whim; and estate tax becomes death tax. Thus, with justification we've come
to expect politicians inhabit an Orwellian world.

- Advertisement -

Elections matter. In recent history, the election of 2000 gave us the
Patriot Act (2001) of course in response to 9/11. The election of 2008 gave us
Obamacare to address the issue of 50 million Americans without health
insurance. The 2010 mid-term election cleared with path for gridlock and the
fiasco of America's credit rating downgrade around the issue of the deficit and
balanced budgets.

In today's shrill demand for
small government we can hear echoes of President Hoover's "rugged
individualism". In the election of 1928 we got the Reconstruction Finance
Corporation that financed the construction of the Golden Gate Bridge, and the
Hoover Dam. But we also got Smoot-Hawley Tariff Act of 1930, which was the
largest tariff hike in U.S. history. This did two things at once--it protected
U.S. industries from foreign imports, but it also reduced U.S. trade to other
countries. The net effect of this hurt the U.S. economy. Failing to understand
the enormity of the depression, President Hoover motivated by a belief in a
balanced budget did two things that we, the wizened people we are, would not do
today--raise taxes and cut government spending in a recession. Really? Won't we!

Around the country, a clique of
relatively newly minted republican governors has been embarked on a frantic
rampage to balance their state budgets. This is not a display of special
courage: they have constitutional amendments that mandate this anyway. But they
(and the U.S. Congress) have tried to achieve balanced budgets by reducing
spending on skills and ability generators such as education, health (Medicaid,
and Medicare); and in a quizzical kind of way they have tried to cut funding
for Planned Parenthood, EPA, NPR, PBS, the National Endowment for the Arts,
foreign aid, which is a small tranche of GDP. They have taken on unions, too;
and engaged battles on contraceptives and abortion. Cutting spending in bad
times is counterintuitive and counterproductive even under the pretext of
balancing the budget. This is Hoover redux (in 1931). On the other hand, his
budget balancing approach included raising taxes.

- Advertisement -

The shortsighted problem here
is that higher taxes in a recession tend to exacerbate the recession by
inhibiting people's efforts to boost the economy. Maybe, republicans get it
right when they ask for tax cuts. But it is not clear to me that they want it
for the right reasons. In a recession such as we have now (out of which we are
groping ourselves), business tax cuts will not increase spending in the face of
high unemployment. Why produce more goods if there is nobody to buy the
additional output? However, a tax cut on consumers would give them an incentive
to shop, which would be good for business. At the risk of stubbing my toes on
the quagmire of class warfare, I'll note in passing that rich people and poor
people are not the same.

Rich people don't need to worry about lots of things:
the next meal, the high price of gas, their mortgage (except if they will
beyond their rich means); tuition for their kids, health insurance, etc. Poor
people have all of these and more to worry about on a daily basis. To unfetter
the poor from the government is to assume rugged individualism, charities, or
the church would breach the financial gap and rescue them. The poor are too
monumental a task for any of this to make a significant dint on their lives by
way of meeting their needs for basic necessities like food, shelter, and
clothing. In another crucial way, the poor and the rich are different. They
address needs differently.

The poor have needs that require immediate
attention--hunger for example. So, redistribution of income in the Robin Hood
sense is a win-win proposition, but not the reverse. Why? Because if you were
to take a dollar from a wealthy person and give it to a poor person, the poor
person is going to spend it. The rich person(s) would hardly be expected to cut
back on consumption for the loss of a dollar. The net effect: consumption (i.e.
spending) rises, which is a positive for the economy.

There are some legitimate
concerns about this--but they tend to be ideological. President Hoover worried
that federal aid to individuals would stifle initiative and create
dependency--this sounds like rationale of advocates of spending cuts and balanced
budgets. Like the rich versus the poor, bad and good times are not the same. In
good times, income is rising (with low unemployment), so government tax
revenues are greater, while government spending is lower--unemployment
compensation, and food stamps outlays fall. This means the government deficit
shrinks. So even if the government does nothing, if all the conditions are the
same, the deficit would get smaller.

The reverse of this holds up in bad times.
Because of high unemployment, federal government receipts decline, and
unemployment compensation and food stamps payments rise, leading to a rise in
the government's deficit. The Bush tax cuts and the Obama $787 economic
stimulus package were appropriate measures for this recession because the focus
had to be on job creation and economic recovery--not on balancing the budget.

The lessons of history are often
too soon forgotten. In the 30s in many ways the government got it wrong in
dealing with the bad economy--fostering higher taxes and tariffs. Back then elections
mattered. And now too elections matter because they put in office people whose
ideological motivations get legislated into law. With Citizen's United the
Supreme Court gave politicians carte blanche to raise huge sums of money to
spend on campaigns. Also, the midterm elections of 2010 led to legislative
activities that not even the most astute political observers saw coming.

- Advertisement -

The
result: what got cast aside were well-established economic theories, which
argue for stimulus spending for dealing recessions. Some policymakers loose
sight of the core problem--the high level of unemployment that denies people
incomes (wages and salaries) to spend on goods firms produce. Instead, states
cut spending and fired thousands of state workers, all of which appears
counterintuitive.

I conclude with this question: In the near term what is more
important a balanced budget or economic growth, which in the long term has the
potential to improve the budget and the national debt? I leave the answer to
you.

Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)